TEXT-Fitch assigns Fintest Trading Co Limited 'B'; outlook stable

(The following statement was released by the rating agency)

Oct 12 - Fitch Ratings has assigned Ukrainian-based mining and metals company FintestTrading Co Limited (Fintest) Long-term foreign and local currency Issuer Default Ratings (IDR)of 'B'. The Outlook is Stable. Fitch has also assigned Fintest a Long-term National Rating of'AA(ukr)' with a Stable Outlook.

The ratings are not constrained by Ukraine's sovereign ceiling so an upgrade ofthe sovereign ceiling would not automatically lead to an upgrade of thecompany's IDR.

The Stable Outlook is supported by Fitch's expectation of positive free cashflow (FCF) generation over the medium-term.

Fintest is a holding company of Donetsksteel Group. Fintest's verticallyintegrated business model is viewed by Fitch as an advantage, as it decreasesthe company's exposure to the highly volatile prices of mining products. Fintestowns production facilities in coking coal, coke and ferrous metallurgy segments.

The Pokrovskoye mine, owned by Fintest, is the third largest independentproducer of coking coal in the Commonwealth of Independent States (CIS) with anoutput of 6.9mmt in 2011. Its reserve base, exceeding 270m tons of coking coal,provides a mine life of approximately 40 years.

Demand for the company's coking coal is expected to be stable in medium-term, asthe mine is favourably located in close proximity to its main customers, in aregion with a shortfall (Ukraine imports up to one third of its coking coal).The high quality of the coking coal produced by Pokrovskoye provides anadditional comfort as it contributes to Fintest's negotiating power comparedwith other producers of coking coal concentrate.

Approximately two thirds of coking coal concentrate is used by the companyinternally for coke production. The company owns two coking plants with eightcoking batteries which produced 2.6mmt of coke in 2011. High quality coal andtechnologically advanced coking facilities allow production of premium qualitycoke. Fintest is the largest player in the Ukrainian merchant coke market with a65% market share according to the company's data.

In the ferrous metallurgical segment the company is focused on pig iron (outputof 1.1mmt in 2011), at the low value-end of the industry and typically exposedto high price volatility. However, the company is an important player in thisniche market, having an 8% market share of the global exports of merchant pigiron, according to the company's data.

Launching a new electric arc furnace with an annual production capacity of0.75mmt, which is expected to be completed in H113, will allow the company toimprove its product mix, as the company will have an opportunity to increase theutilization rate of its rolled metal production facilities. However, thecompany's high exposure to semi-finished products will remain.

Factors constraining the company's ratings include its limited geographicdiversification as the company's operating assets are located in Ukraine. InFitch's view exposure to this country entails higher-than average political,business and regulatory risks. The concentration of the company's coal miningwithin a single coal deposit makes Fintest exposed to additional operationalrisks. The company exploits two independent mine shafts, which mitigates therisk of the full termination of coal mining operations in case of technicalaccidents.

According to Fitch's base case expectations, the company will have an EBITDARmargin of 14% in FY2012, 16% in FY2013 and 17% in FY2014 (FY2011: 19.7%). Thedecrease of profitability in 2012 is explained by the unfavourable pricedynamics for mining companies in FY2012. This will lead to an increase in fundsfrom operations (FFO) adjusted gross leverage to 2.9x (FY2011: 1.7x). In themedium-term, due to slightly positive free cash flow (FCF) generation, thecompany's FFO adjusted gross leverage is expected to decrease to 2.5x byend-2013 and to 2.2x by end-2014.

The company's current liquidity position is viewed by Fitch as satisfactory.However, the peak debt repayment in FY2014, amounting to more than USD450m, willnot be covered by the company's expected FCF of USD80m. Refinancing willtherefore be necessary.


Positive: Future developments that may, individually or collectively, lead topositive rating action include

- FFO adjusted gross leverage below 2.5x on a sustained basis - Successful refinancing of the debt due in 2014

Negative: Future developments that may, individually or collectively, lead tonegative rating action include

- Inability to roll over maturing debt and attract new financing to meet debtobligations

- FFO adjusted gross leverage above 3.5x on a sustained basis

((Bangalore Ratings Team, Hotline: +91 80 4135 5898Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, ReutersMessaging: Debanjali.Ghosh.reuters.com@reuters.net))